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5 Self-Directed Roth IRA Alternative Investments

January 13, 2025

By: Dana Udumulla

Key Points 

  • Self-Directed Roth IRAs are vehicles that permit investors to paddle through the waters of alternative assets.
  • By investing beyond Wall Street, Self-Directed Roth IRA alternative investments grant retirement portfolio diversification, tax advantages, and more.
  • With such a broad spectrum of accessible investments, narrowing down to an alternative asset that suits your style can be trying. Madison Trust is here to help you learn more about alternative investing.
A woman dressed in fashionable business attire poses the question: what is your ideal approach to alternative investing?

Self-Directed Roth IRA alternative investments offer you the chance to possibly mitigate risk regarding your retirement savings. In addition to rifling through investments offered at standard brokerages and banks like stocks, bonds, and mutual funds, allocating a portion of your savings towards alternative investments can help balance your overall portfolio. These assets are generally uncorrelated with Wall Street, thereby typically performing contrary to public markets. The available options of alternative assets are extraordinary, and pinning down which class best suits your experience and ambitions can seem profuse. This article discusses five widely held Self-Directed Roth IRA alternative investments. Let’s dive deeper:

Investors can utilize Self-Directed IRAs (SDIRAs) to directly purchase real estate if they’re eager to take charge of their retirement. However, for those who prefer passive investing, there are also options available in the real estate sector. The opportunities for Self-Directed Roth IRA alternative investments are quite extensive in the realty realm, providing various avenues to attract the interest of different investors. 

A couple enjoying the scenery and wine at a vineyard contemplate the potential of investing in a vineyard as their Self-Directed Roth IRA alternative investment of choice.

There’s no property dream too big or too small. You can opt to invest in residential properties, which usually convert into rental properties unless your goal is to invest in fix and flips. Besides providing families and civilians with homes, you can also transform your rental property into a vacation rental or Airbnb. Commercial properties can be storefronts, restaurants, coffee shops, industrial warehouses, storage facilities, and beyond. Furthermore, you could choose to invest in raw land, which can equate to farmland, timberland, stations for renewable energy projects, wineries, land designated for mobile homes, and more.

Participating in a crowdfunding endeavor may be more fitting as your Self-Directed Roth IRA alternative investment. This allows you to contribute funds alongside a pool of investors, and receive equity or debt returns based on your investment. The amount you contribute to this endeavor can be relatively low if desired. Another option is to pursue a real estate syndication, which are structured investments where a group of investors combine their resources to buy a larger property. A syndicator or sponsor manages the investment and handles all associated operations.

Private real estate investment trusts (REITs) are also possibilities and differ from crowdfunding and syndications in several ways. REITs generally involve private companies that own, operate, or finance income-generating real estate across various branches. These investments permit your retirement portfolio to be exposed to a diversified spread of properties. Because of the expansiveness of this investment, REITs tend to be heavily regulated under securities laws. In contrast, real estate syndications and crowdfunding ventures may have less oversight. 

A hand holds a lightbulb near a model house, indicating that joining a passive real estate endeavor – such as a REIT or syndication – could be the ideal Self-Directed Roth IRA alternative investment.
A trio of prospective investors weigh the pros and cons of various Self-Directed Roth IRA alternative investments.

Real estate is unlikely to ever lose its value completely as it is a tangible alternative asset. Subsequently, any income earned from your Self-Directed Roth IRA alternative investment will accrue tax-free earnings. It’s presumable that you would want to uphold the integrity of your account and its development. Ensuring you do not use your investment property for personal use, or for the use of any disqualified persons, is crucial for keeping your retirement savings uncompromised. You may want to consult with your financial advisor to verify that your investment plans do not result in the performance of any prohibited transactions

2. A Globally Recognized Asset: Precious Metals

Precious metals are another highly sought Self-Directed Roth IRA alternative investment. Similar to real estate, precious metals are also tangible assets. Since they’re considered their own form of currency, their value typically increases during periods where the stock market subsides. Furthermore, precious metals contain a rich, historic life, with worthiness and appeal throughout history, even serving as components to many cultural folklores.  As precious metals are also paramount to many modern-day appliances and applications, it’s likely that a necessity will remain for these rare earth metals.

Bars and rounds of silver are shown, depicting that silver is one of the four allowable precious metals within an IRA.

It’s important to note that the IRS only permits four types of precious metals within an IRA. Simultaneously, these precious metals must also meet certain fineness requirements. Allowable precious metals are as follows: 

  • Gold: 99.5% pure 

Your precious metal will also be qualified for IRAs if they are bullion coins, bars, and rounds that are produced by refiners, assayers, or manufacturers. These respective agencies must be accredited by certain distributors or bare a national government mint.  

Before purchasing your chosen precious metal, it’s advisable to confirm that it qualifies as an IRA-eligible asset. The IRS prohibits all IRAs from investing in collectibles, and precious metals that don’t meet specific criteria could fall into that categorization. Monitoring the liquidity of your precious metals is also greatly encouraged. Creating a plan can enhance your precious metal investment’s ability to support you during retirement. This should also include budgeting for any future storage or insurance costs. 

An image of a vault in a depository explains that when opting to participate in precious metals as your Self-Directed Roth IRA alternative investment, you must store your metak in an approved depository.

Madison Trust works directly with FideliTrade and Delaware Depository on all Precious Metal IRA trades. This certifies that you receive a fair paying price, in conjunction with safe storage in Delaware Depository’s secured vault.  

3. An Asset to Lend a Helping Hand: Promissory Notes

Some prospective investors are unaware that Self-Directed Roth IRA alternative investments can also be loans. Employing your SDIRA to issue a loan to an individual or business in need can be financially rewarding, as well as emotionally. One common way to achieve this is to invest in promissory notes. Promissory notes are a form of private lending that serve as a written agreement and legal contract for a loan. This document outlines the loans due date, interest rates, repayment schedule, collateral, and any other relevant terms of the arrangement.

A Self-Directed Roth IRA owner decides to issue a loan to a struggling business, implementing the promissory note as their choice for their Self-Directed Roth IRA alternative investment.

Since the terms of the agreement are viewable and agreed upon by both the borrower and the loaner, there are generally no surprises with this investment. Some investors prefer promissory notes to other Self-Directed Roth IRA alternative investments as they are relatively predictable and produce steady, consistent returns. This renders a simple asset to balance your retirement portfolio. 

All loans must be issued to a third-party recipient. Issuing loans to lineal descendants, closely held entities, or entities that are owned 50% or more by you or your lineal descendants, are prohibited transactions as these are all disqualified persons. If wary, it’s best to refer to a financial advisor before issuing a loan to someone who may be prohibited unbeknownst to you. 

The promissory note investment is also utilized as a SDIRA owner issues a loan to a farmer.

Moreover, the loan title should be held in the name of your IRA, and not under your name personally. Upon instruction, your Self-Directed IRA custodian will send the confirmed loan amount to the borrower, and the borrower will reimburse your IRA by making payments directly to your Self-Directed Roth IRA. 

4. A Forward-Thinking Self-Directed Roth IRA Alternative Investment: Private Placements

For those eager to participate in ventures that are building from the ground up, investing in a privately held LLC, private equity fund, hedge fund, startup, or small business may be an excellent choice. Private placements are sometimes known as private stock or private equity. By investing in a private placement, you can potentially provide essential capital to a growing business. 

Generally, private placements have a three-to-five year holding period before an investor can cash out or liquidate their position. This aligns perfectly with the purpose of Self-Directed Roth IRAs. Their intent is to cultivate a possibly secure and stable retirement – not benefit you in the present day. If you have a long-term mentality and agenda, then this alternative investment may be your match.   

A figurine of a retired couple is nestled between large stacks of coins, showing that having money put away for your retirement can possibly bring on a sense of security.

As with any investment, there is risk involved with private placements. As custodians cannot legally offer any investment or financial advice, it’s imperative that you as the account holder perform adequate due diligence. Consider reviewing the investment documents, such as the purchase and operating agreement, to determine what you’re entitled to as a shareholder. Some investments may only be open to accredited investors. Evaluate whether this investment compliments your degree of experience and budget, and if they’ll accept you onboard. 

5. Creative Self-Directed Roth IRA Alternative Investments: Intellectual Property

Investing in intellectual property is a distinctive asset class that is often overlooked by traditional investors. It encompasses creations of the mind that are protected through licensing to prevent unauthorized use. The type of intellectual property you choose to invest in depends on the specifics of its creation. The three prevalent kinds are patents, trademarks, and copyrights.  

Patents – Used for inventions, products, and processes. You can purchase rights from the original inventor and potentially earn royalties from its sale. 

Trademarks – These are applied to designs, images, slogans, phrases, or words affiliated with an organization or product. You can invest in the license and procure funds if the trademark gets sold. 

Copyrights – These are primarily used for tangible artistic works. Investing in copyrights can earn royalties from the distribution of the work. 

Investing in intellectual property can provide a layer of protection for creative ideas, ensuring that outside parties cannot replicate these respective materials. You can make your Self-Directed Roth IRA alternative investment in the intellectual property of books, music, screenplays, and fashion lines, among other creations. 

An artist sits beside her artwork, pleased that an investor employed their retirement funds for her intellectual property as their Self-Directed Roth IRA alternative investment choice.

Investing in any form of intellectual property varies greatly from investing in antiques or actual artwork. The IRS considers artwork a collectible item, but not the copyrights of said artwork. Investing in a collectible is a prohibited investment as the IRS does not allow IRA funds to dabble in such endeavors. 

At Madison Trust, these types of investments are only feasible through a Self-Directed Checkbook IRA. If you’d like to proceed with this asset, it’s encouraged that you confirm it’s accessible with your custodian. 

Examining the Potential of Self-Directed Roth IRA Alternative Investments

Alternative investments can offer higher potential returns and diversification benefits. Congruently, Self-Directed Roth IRAs are retirement accounts that grant you the ability to invest in assets that parallel with your passions and areas of interest. This can render investing and preparing for your retirement all the more enticing.  

The Self-Directed Roth IRA Alternative Investment Highway infographic explores five exits including real estate, precious metals, promissory notes, private placements, and intellectual property.

Incredibly, these top five assets are not the only ones your SDIRA can engage. Our Self-Directed IRA Specialists are rigorously trained in a variety of asset classes and can help answer any questions that arise around prospective investments. If you’re looking to expand your investment repertoire, Schedule a Free Discovery Call today! 

Are you ready and eager to take on your self-directing adventure? Cal us today to learn more about Self-Directed Roth IRA alternative investments.

Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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